Post-Fed Strategy: Time to Look at Asia Cyclicals

Nicholas Ferres, Investment Director of Global Asset Allocation at Eastspring Investments, believes that Asia stocks are attractive now.

“I think the most important that investors should do is to look for assets that are relatively cheap. Assets that we feel are cheap are some of the global cyclicals in particular the metals and mining sector, which we recently went overweight on.”

Vasu Menon, Vice President of Wealth Management at OCBC Bank go one step further and says investors should not be fearful now.

OCBC’s Menon also favours China and Hong Kong because of their cheap valuations, but cautions that investors should dip their toes in gradually. The Shanghai Composite index (Shanghai Stock Exchange: .SSEC) is valued at 9.7 times estimated earnings, compared with the 17.4 average since 2006. Hong Kong’s Hang Seng (Hong Kong Stock Exchange: .HSI) is trading at 9.06 times compared with an average of 19 times.

“I know China is off the radar screen but Chinese equities have done so poorly in the past 3 and a half years, valuations are cheap at this juncture, expectations are almost zero,” Menon said. “I think you would to start buying gradually, not throw all your money in at one go…Hong Kong as well, that’s another cyclical market, that could do well.”

More conservative investors can consider buying bonds, Menon added.

“In Asia, you see a lot of money going into bond markets,” he said. “But you don’t want to be too careful at this juncture of the market. What we have seen in the past two years is after a 10-15 percent correction, the money starts getting put back into the market and we see a rebound. It’s not a good idea to be too fearful at this juncture and to be too risk averse.”

There are some virtues in their opinions. Shanghai Composite Index is still a pale shade of its former glory. With current P/E ratios below 10, we could see prices rally back up when greed takes over fear.

What does that mean for Asian currencies?

The general rule of thumb for Emerging Markets currencies is that should the share prices increase, the currency will strengthen as well. However Bank of Thailand mentioned that they do not believe we will see a surge of incoming funds this time round as compared to previous 2 QEs.

Asian Development Bank also warns that increased capital flows from the West as central banks embark on easing measures, could lead to a surge in volatility and create asset bubbles. The report further mentioned that during the 2008/2009 easing operation, government bond yields in Indonesia rose as much as 9 percentage points, while in South Korea, Malaysia, and Thailand, the increase was 2 percentage points.

Via – CNBC

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